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Sears Holdings Corp. has filed for Chapter 11 in bankruptcy court in Manhattan, the company announced.

In connection with the filing, Eddie Lampert resigned as the company’s CEO, effective immediately, to be replaced by an “Office of the CEO” to manage the company’s day-to-day operations that is composed of CFO Robert Riecker and retail executives Leena Munjal and Gregory Ladley. Lampert will continue, however, as chairman of the board. In addition, the company has appointed a chief restructuring officer, Mohsin Y. Meghji, who is a managing partner of M-III Partners.

The filing, which was announced in the early morning hours, was expected. Sears had a $134 million debt payment due today on its second-lien debt that it was widely expected to miss, determining the timing, and numerous published reports last week said that Sears had hired boutique advisory firm M-III Partners to help prepare the filing and that the company was seeking DIP financing.

The company said in a news release that it “expects to move through the restructuring process as expeditiously as possible and is committed to pursuing a plan of reorganization in the very near term as it continues negotiations with major stakeholders started prior to today’s announcement.”

In connection with the filing, the company said it had commitments for $300 million in senior priming DIP financing from its senior secured asset-based revolving lenders, and that it was negotiating a $300 million subordinated DIP with hedge fund ESL Investments, the company’s largest stockholder and creditor.

Lampert is ESL’s founder and CEO.

The senior DIP is composed of roughly $189 million in revolving ABL commitments, priced at L+450, with an undrawn commitment fee of 0.75%, and a $111 million term loan subject to a borrowing base formula at L+800, according to bankruptcy court filings. Bank of America is the agent.

The company told vendors that with the DIP funding it would be able to pay them in the ordinary course of business for goods and services provided after today. Pre-petition amounts owed, however, would be repaid in the context of a reorganization plan, although some vendors would receive preferred treatment under the company’s “critical vendor motion.”

According to the court filing, some 200 vendors had stopped shipping merchandise to the company in the past two weeks.

The contemplated junior DIP, meanwhile, would be in an initial amount of $200 million, which could be upsized to $300 million at the discretion of the agent bank (which is to be determined, but will be named by ESL), and would bear interest at L+950. Cyrus Capital would also be a lender under the junior DIP, court filings show (note, however, that while it is included in the company’s DIP approval motion, the junior DIP will not be considered by the court until a second interim hearing, and could be replaced by an alternative financing transaction).

The company said in court filings that it only had a short period of time in which to negotiate the DIP because it first approached lenders only 10 days ago. The company explained that it was hesitant to approach potential lenders too far in advance because of concerns that media focus on the company would cause such inquiries to be become a self-fulfilling prophecy, adding, “In hindsight, those concerns about adverse publicity were well-founded, as discussions regarding debtor in possession financing become the subject to media reports and speculation.”

In any event, the company said its Sears and Kmart stores, along with its online and mobile platforms, are open and continue to offer a full range of products and services to members and customers.

This is significant, as news reports last week said that some of the company’s lenders were pushing for a liquidation of the company.

The company said in a news release that it intends to reorganize around a smaller store platform of EBITDA-positive stores, adding that it is currently in discussions with ESL regarding a stalking-horse bid for the purchase of a large portion of the company’s store base.

The company also said it plans to close 142 unprofitable stores near the end of the year, and that liquidation sales at these locations “are expected to begin shortly.” The company noted these closings would be in addition to the 46 store closings that the company previously announced.

In court filings, the company said it would reorganize as a “member-centric” business.

More specifically, in terms of a reorganization path, Riecker explained in his first day declaration filed with the bankruptcy court that about 400 of the company’s stores are “four-wall EBITDA positive (before any lease concessions),” and that the company intends to sell “these and other viable stores, or a substantial portion thereof,” as a going concern pursuant to Section 363 of the Bankruptcy Code. These are the stores about which the company is in negotiations with ESL, Riecker said, adding that if a transaction were successful, the result would be “a right-sized version of the company” that not only would save the Sears and Kmart brands, but “the jobs of tens of thousands of employees.”

Additionally, Riecker said the company would market and sell certain non-core assets, such as intellectual property and specialty businesses, to help finance the Chapter 11 cases and maximize value. Riecker said the company has “moved those discussions [excluding the store closures already announced] within the confines of the Chapter 11 cases to provide all of the company’s stakeholders, as well as the court, with the opportunity to evaluate the wisdom of those transactions.”

The liquidations of the initial round of 142 store closures would net the company $42 million, Rieger said.

According to Riecker’s declaration, the company has “certain tax attributes,” including a tax basis in certain assets exceeding the value of those assets, in excess of $5 billion in net operating loss carryforwards, and tax credits of roughly $900 million, although it is unclear at this point exactly how these tax attributes would figure into any going concern sale.

The company said it formed a special committee to oversee the restructuring process that would “have decision making authority with respect to transactions involving affiliated parties.” The special committee is composed solely of independent directors, specifically, Alan Carr, Paul DePodesta, Ann N. Reese, and William Transier.

The company named Carr, a well-known advisor and attorney in the restructuring industry, to the board last week, setting off the intense media speculation about the company’s coming Chapter 11 filing. Similarly, the company noted that Transier “has extensive restructuring experience involving companies with complex capital structures and has served on special committees of independent directors responsible for overseeing restructuring processes.”

In terms of milestones, the company’s DIP provides that the company must file a reorganization plan and disclosure statement by Feb. 18, 2019, that the company obtain approval of its disclosure statement by March 25, 2019, that the company obtain confirmation of the reorganization plan by April 29, 2019, and that the plan become effective by May 14, 2019.

While these milestone deadlines should be treated with a large grain of salt at this point in the proceedings, given the reported desire of some lenders to see the company liquidated and the failure of the company’s prior restructuring initiatives to gain traction, it is worth noting that Riecker warns that “time is of the essence in these Chapter 11 cases.”

The company currently “burns a significant amount of cash—approximately $125 million per month—in the course of operating [its] business,” Riecker said, explaining that this burn rate “is due, at least in part, to the discrepancy between the company’s operational capacity, which can support a business of the company’s previous size, and the company’s current, reduced footprint that has resulted from its ongoing store closure initiative.”

Rieger said the company hopes “that this imbalance will be corrected through the purchase of the company’s viable stores, but in the meantime, these Chapter 11 cases must progress with all due speed to stem these substantial operating losses that will continue to decrease the value of the debtors’ estates.” — Alan Zimmerman

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

Sears Holdings Corp.‘sboard yesterday named Alan Carr as an independent director. Carr is managing member and CEO of Drivetrain, a distressed and restructuring advisory firm.

Carr is set to hold the position until the issuer’s 2019 annual shareholder meeting or until a successor is elected and qualified, according to a company filing.

Soon-to-mature bonds of Sears were thinly traded on news of Carr’s appointment, with the issuer’s roughly $134 million of 6.75% second-lien notes due Oct. 15 changing hands on either side of 87.5, roughly in-line with levels week-over-week.

In addition to the above-mentioned notes, Sears has $668 million of other debt maturing in the next twelve months, according to regulatory filings.

The move comes two weeks after Sears CEO Eddie Lampert’s hedge fund ESL Investments outlined a multi-pronged proposal for the distressed retailer to avoid bankruptcy, according to an amended filing with the SEC. Lambert’s Sept. 23 plan calls for the restructuring of around $1.1 billion of the company’s debt via a distressed exchange that would reduce its $5.6 billion debt burden to approximately $1.24 billion, assuming all sale proceeds are used to pay down debt, according to the filing.

Lambert’s proposal also urges the company to sell $1.5 billion of real estate as well as divest some $1.75 billion of assets, including Sears Home Services and the Kenmore appliance brand, the proceeds of which would be used to pay down debt.

As reported, Lampert earlier this year urged the ailing retailer to sell its prize assets, writing in a letter that ESL is willing to acquire the Sears Home Services division and PartsDirect business. ESL has also offered $400 million to acquire the Kenmore brand.

In terms of the previously mentioned distressed exchange, ESL has proposed that eligible holders of the ESL second-lien PIK loan due 2020 and 2019 would be offered the option to exchange their holdings for mandatorily convertible secured debt or else extend maturities with a reduced conversion price. Unsecured holders are offered the choice to swap into mandatorily convertible unsecured debt or a cash option. The aforementioned 6.75% second-lien notes due October 2018 are excluded from the proposal.

Hoffman Estates, Ill.–based Sears Holdings operates in two segments, Kmart and Sears Domestic. Sears Roebuck Acceptance Corp. operates as a subsidiary of Sears, Roebuck and Co., which itself is a subsidiary of Sears Holdings. Ratings are CCC–/Ca on Sears Holdings and CCC–/C on Sears Roebuck Acceptance Corp. — James Passeri/Rachelle Kakouris

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

Oaktree Capital Management on Sept. 6 objected to confirmation of Claire’s Stores’ reorganization plan, saying that “there are more than 20 material flaws” in the plan, “any one of which standing on its own could be a basis for the denial of confirmation of this plan at this time.”

Further, according to Oaktree, “taken in the aggregate, and viewed collectively as a body of work, these flaws can lead to but one conclusion: the process in these Chapter 11 cases, and the [reorganization] plan it has produced, are so tainted that the … plan cannot now be confirmed.”

As reported, a reorganization plan confirmation hearing is scheduled for Sept. 17.

As reported, prior to filing for Chapter 11 the company entered into a RSA with an ad hoc group of first-lien lenders led by Elliott Associates and Monarch Alternative Capital, as well as with the company’s equity sponsor, Apollo Management.

Among other things, the ad hoc group agreed to backstop a $575 million rights offering to fund the reorganization plan.

Under the proposed plan, first-lien lenders, with claims of about $1.43 billion, would receive 100% of the reorganized company’s equity, along with a deficiency claim—a recovery valued by the company’s disclosure statement at 69.9% (although the actual recovery will be slightly higher, just over 70%, because second-lien lenders voted to reject the plan, and therefore will not participate in the deficiency claim pool, increasing the first lien deficiency claim distribution by about $8 million).

Second-lien lenders—who, as noted, voted to reject the plan—will participate in the cash recovery for general unsecured creditors, a recovery valued at 0.003–0.495% (had second-lien lenders voted in favor of the plan, they would have participated in the deficiency claim recovery with first-lien lenders on a pro rata basis for a cash recovery of 3.5%).

Throughout the case, Oaktree has argued that the $1.4 billion total enterprise valuation upon which the RSA and proposed reorganization plan are based is too low. In late June, Oaktree successfully challenged the company’s limited and truncated initial marketing process, obtaining a court order requiring the company to extend the process through Aug. 31, and opening it to a wider variety of deals than the 100% payout-event plan initially demanded by the company.

Oaktree was expected to submit a bid in connection with that process, but apparently did not do so.

In its objection, however, Oaktree renewed its argument that the reorganization plan is nonetheless premised on a valuation that is too low.

According to Oaktree, the company’s own financial expert pegged the company’s TEV at a midpoint of roughly $1.52 billion, or $120 million more than plan value.

Oaktree said its expert valued the company at a midpoint TEV $1.992 billion, which the company said was “consistent with all indications of the debtors’ value” other than company’s aforementioned $1.52 billion valuation, which Oaktree described as an “outlier.”

Among the indications of value that Oaktree cited that were consistent with a higher valuation were a valuation of $2.022 billion used by the company in authorizing its 2016 exchange transaction, as well as “the $2.053 billion valuation implied by the percentage recovery provided to holders of general unsecured elective claims under the [reorganization] plan.”

At the higher valuation, the distribution to first-lien lenders would exceed the value of first-lien claims, Oaktree argued. Oaktree also noted that the full value of the first-lien lenders’ participation rights in the new money investment, given the low valuation and the rights offering’s below market rates and plan discounts, was not fully factored into the plan’s recovery calculations.

As for the company’s efforts to market test its valuation, Oaktree argued that the company ran “not one, but two flawed sale processes, the admitted purpose of which was to validate the low-ball valuation that underlies the [proposed reorganization] plan, rather than to obtain a value maximizing purchase offer.”

In addition, Oaktree said the marketing process “featured zero meaningful involvement from the [creditors’] committee, which was not permitted to participate in and had no role in shaping, the debtors’ communications with bidders.”

Oaktree alleged the company’s marketing “outreach was lackluster, rushed, and overseen by a conflicted finance committee with the assistance of conflicted professionals.”

Lastly, Oaktree also said that critical information was withheld from bidders during the marketing process (although the specific information withheld was redacted from the publicly-filed objection), arguing that this issue was “particularly troublesome” because the company had justified its lower plan valuation by citing the feedback from the marketing process, namely, the lack of a bid.

According to Oaktree, however, while an independent bid from the market can be evidence of enterprise value, “the absence of a bid that the debtors deem to be qualified is evidence of nothing.”

Oaktree added, “That is particularly true here where evidence will show that bidders were influenced by the compressed timing of the process, by the taint of a contentious bankruptcy, and by the perception that the debtors would resist any bid that was not favorable to Apollo and the ad hoc first lien group.”

In addition, Oaktree argued that Apollo’s participation rights in the new money investment, amounted to a recovery to equity holders greater than that for second-lien and unsecured claims in violation of the absolute priority rule.

With respect to the specific terms of the company’s proposed reorganization plan, Oaktree charged a wide array of gerrymandering, gifting, and classification allegations that, taken as a whole, paint a picture of purported recoveries to other unsecured creditors at the expense of second-lien lenders.

For example, Oaktree expects to recover between 0.003–0.495% of its claim, compared to recoveries of 6.2% for first-lien deficiency claims, 14.6% for unsecured note claims, and 74.2% for general unsecured elective claims.

According to Oaktree, the magnitude of the difference in treatment among different flavors of unsecured claims exceed those that have previously been held to violate the Bankruptcy Code’s prohibition of discrimination within a creditor class. Oaktree further contends that the company’s rationale for these differences, the gifting of certain carve outs from the first-lien collateral, do not meet legal requirements for such gifts. — Alan Zimmerman

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

Senior lenders of Pacific Drilling are keeping up their pressure on the company to reorganize sooner rather than later, objecting to the company’s requested 120-day extension of its exclusive periods to file and solicit acceptance to a reorganization plan, despite the company’s offer to agree to mediation in the Chapter 11 case in exchange for the extension.

The battle over exclusivity evidences the continuing breakdown of trust between the parties in the case, at least insofar as the senior lenders are concerned. Lenders have maintained since the case was filed that the company was merely seeking to delay the case and was not acting in good faith to develop a reorganization plan.

The company’s secured lenders late last month sought to force the company into mediation, but the company argued that mediation would be premature at this relatively early stage of the case, and the bankruptcy court overseeing the case denied the secured noteholders’ motion.

In connection with its requested exclusivity extension filed late last month the company said it would now be willing to engage in mediation with secured lenders, provided, among other things, that the senior creditors agreed to the exclusivity extension.

But senior noteholders would not bite, suggesting that the company’s offer to engage in mediation was insincere.

In a March 14 objection to the proposed exclusivity extension, an ad hoc group of secured noteholders noted that while the company “promised serious plan negotiations beginning in January,” it was not until the filing of its exclusivity motion last week that the company agreed to a mediation process.

“If past is prologue,” the ad hoc group asserted, “the debtors have not—and thus will not—show diligence, and extending exclusivity will not advance the cases.”

Beyond rejecting the company’s mediation offer, the ad hoc group charged that the company had “squandered” its first four months in Chapter 11 and “cannot point to any progress [it has] made to show cause to extend exclusivity.”

The ad hoc noteholder group further said, “What makes this failure even more egregious is the comparative simplicity of the task at hand: a balance sheet restructuring to be negotiated among well-organized creditor groups with experienced counsel.”

The company argued in its exclusivity extension motion last week that “after a contentious start to the Chapter 11,” it has “been working hard to jump-start meaningful restructuring negotiations.” The company also asserted that “a lot has been going on in these cases, mostly out of court,” citing numerous telephone conversations and face-to-face meetings with creditors, its development of a business plan, and its efforts to resolve various contingencies, including an arbitration case in London that could add $350 million to the company’s unrestricted cash and eliminate a $336 million unsecured claim against the company.

But the ad hoc noteholder group was not buying that, either.

“It was not until months after the cases were filed, and as their 120-day exclusivity period drew to a close,” the group said in its objection, “that the debtors even retained experts and began to put together a business plan.”

Wilmington Trust, the agent bank under the company’s senior secured credit facility, made a similar argument, reiterating its concern that the company and its equity sponsor, Quantum Pacific, were simply seeking to delay the case in the hope that changing market conditions would ultimately create value for an equity recovery in the case.

Meanwhile, lenders under the company’s prepetition revolver and Citibank, the agent under the company’s RCF, did not formally object to the extension, since doing so would, under the cash collateral orders entered in the case, endanger adequate protection payments to RCF lenders.

Still, Citibank said in its response to the motion, “The [bankruptcy] court … should be under no illusion that the agent supports the debtors’ request to extend their exclusive periods within which to file, and solicit acceptances on, a plan of reorganization.”

Similarly, an ad hoc panel of RCF lenders said in a court filing, “The absence of an objection to the motion should not be construed as affirmative support for an extension of exclusivity and that the RCF group has concerns regarding the progress of these cases.”

A hearing on the exclusivity extension is set for March 21. — Alan Zimmerman

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

iHeartMedia lenders have again agreed to forbear from calling default on the company’s missed interest payment, as the radio broadcaster continues to work on a consensual pre-arranged bankruptcy filing.

In a Form 8-K filed with the SEC, iHeartMedia said lenders have agreed to forbear on the missed interest payment until 11:59 p.m. Central Time on March 12, from the previously extended deadline of March 7.

As reported, iHeart failed to make a $106 million Feb. 1 interest payment to holders of its 14% senior unsecured notes due 2021 issued via subsidiary iHeartCommunications, entering instead into a customary 30-day grace period with lenders.

The company earlier this week filed a draft restructuring support agreement and term sheet showing senior lenders—including holders of the company’s term loans and priority guarantee notes—stand to receive 93.25% of the recapitalized equity, bridging the gap on a key sticking point of contentious year-long negotiations between the company’s sponsors and its debtholders.

iHeart is also is also operating under a customary 30-day grace period after it missed interest payments due on two series of priority-guarantee notes, ramping up the pressure among its more senior lenders to achieve a comprehensive restructuring of the company’s $20 billion debt load. — Rachelle Kakouris

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

Fieldwood Energy has filed for bankruptcy protection in Houston to implement a restructuring plan that would reduce the company’s debt by $1.6 billion.

In a statement, the company said it has secured a $60 million DIP to support its Chapter 11 case, and intends to raise about $525 million in capital through an equity rights offering.

Additionally, Fieldwood said it has agreed to acquire all the deepwater oil assets of Noble Energy, located in the Gulf of Mexico, which complement its existing asset base and operations.

Details of the company’s restructuring support agreement have yet to be filed with the court, but the company said it has secured support from key stakeholders, including those holding 75% in principal of its first-lien debt, 72% in principal of its first-lien last-out term loan, and 77% in principal of its second-lien term loan, in addition to private equity sponsor Riverstone Holdings.

Today, Fieldwood filed a number of customary motions, including requesting clearance to pay pre-petition claims and use its cash management system. A first-day hearing has been scheduled for tomorrow morning.

The company also requested that its case be designated as a complex Chapter 11 due to the fact that it has more than $10 million in liabilities and there are more than 50 parties in interest in the case.

Fieldwood reported $1–10 billion in assets and liabilities in its petition.

The company recently entered into forbearance with first-lien last-out and second-lien term loan lenders after the exploration-and-production company failed to make interest payments due Dec. 29.

Fieldwood, a portfolio company of Riverstone Holdings, focuses on the acquisition and development of conventional oil and gas assets in North America, including the Gulf of Mexico.

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

Toys R Us is seeking bankruptcy court authority to close up to 182 “underperforming brick-and-mortar store locations” in the United States, according to a court filing.

The company has roughly 900 stores in the U.S.

According to a Jan. 23 court filing, the company has not yet made the final decision to close all of the locations, saying that some final decisions will depend upon whether the company is able to negotiate more favorable lease terms for those stores.

The company did not specifically state when those final decisions would be reached, but said lease negotiations are “continuing.” The company said, however, that it expects most of the closings to be completed by April 16.

The company said the store-closing plan follows a performance evaluation that included “an extensive store-by-store performance analysis of all existing stores evaluating, among other factors, historical and recent store profitability, historical and recent sales trends, occupancy costs, the geographic market in which each store is located, the potential to downsize certain stores, the potential to consolidate certain Toys “R” Us and Babies “R” Us locations within a reasonable proximity of one another, the potential to negotiate rent reductions with applicable landlords, and specific operational circumstances related to each store’s performance.”

With respect to the stores pegged for closure, the company said that “overwhelming majority … have negative sales trends and have failed to meet the performance standards set by the debtors.”

The company added that it may ultimately need to close additional stores, noting that it had recently filed (and following a hearing yesterday, the Richmond, Va., bankruptcy court had granted, according to the court docket) a motion to extend the deadline for deciding on the assumption of store leases through the date that a reorganization plan is confirmed (the current deadline to decide upon leases was April 16).

As reported, the company is targeting the summer of 2018 for confirming a reorganization plan, with the goal of emergence from Chapter 11 ahead of the 2018 holiday season.

Meanwhile, in connection with the current round of story closings, the company is seeking to retain two groups, joint ventures Hilco Merchant Resources/Gordon Brothers and Tiger Capital Group/Great American, to manage the process and related sales of merchandise and furniture, fixtures, and equipment.

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

Armstrong Energy on Jan. 9 entered into an amended restructuring support agreement with the unsecured creditors’ committee in its case under which the company boosted the recovery for holders of general unsecured claims, and the panel agreed to support the company’s reorganization plan, court filings show.

The company filed an amended reorganization plan on Jan. 9, reflecting the increased recovery.

The company’s reorganization plan confirmation hearing remains scheduled for Feb. 2, according to the court filings. The St. Louis bankruptcy court approved the adequacy of the company’s disclosure statement on Dec. 18, 2017.

Under the amended plan, the company would establish a GUC reserve of $2.2 million, with the company providing $1.225 million, Thoroughbred Resources (the company’s primary mineral rights provider, and a subsidiary of the company’s equity sponsor) contributing $0.55 million, and Knight Hawk Holding (which will manage the company’s operations upon completion of the restructuring transaction) contributing $0.425 million.

The company’s initial disclosure statement said that unsecured claims would be allowed in the amount of $124–127.8 million, including a senior note deficiency claim (which would not receive any distribution from the GUC reserve) of $99.1–102.8 million, translating into allowed GUCs that would receive a distribution from the reserve of $21.2–28.7 million, or a recovery of 7.7–10.4%.

Under the company’s initial plan, the recovery for GUCs, which consisted of a distribution of unencumbered collateral, would have been minimal, at 0–1%.

As reported, under the company’s proposed reorganization plan, the company’s noteholders would receive all of the equity in a reorganized company in exchange for the satisfaction of $90 million of their claims, subject to higher and better offers that the company agreed to seek during a 45-day post-petition marketing period.

The company said late last year that it was continuing to evaluate two indications of interest that it received during the marketing period, notwithstanding its expiration, “to determine which proposal, including the one memorialized in the transaction agreement [with noteholders], represents the highest and best offer.” — Alan Zimmerman

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

Toymaker Mattel has revealed that it is getting looser borrowing terms just after industry peer Toys ‘R’ Us filed for bankruptcy. Mattel today disclosed amendments to its credit facility in the wake of the Toys ‘R’ Us Chapter 11 filing, providing for relief from its consolidated-debt-to-consolidated-EBITDA requirement for the fiscal third quarter of 2017, and an increase in the ratio threshold to 4.5x for the fiscal fourth quarter, from 3.75x previously, according to regulatory filings. The ratio requirement then declines to 4.25x over the balance of the covenant-modification period, which ends at the issuer’s request or when consolidated debt to EBITDA is 3.75x or less for four consecutive quarters. (For more information on covenants, click here.)

For reference, Mattel in 2013 boosted its unsecured revolving credit facility to $1.6 billion, from $1.4 billion, under a leverage covenant of 3x.

Notably, the definition of consolidated EBITDA was amended to add back a cap on extraordinary, unusual, non-recurring, or one-time cash expenses, losses, and charges at $275 million, today’s filing shows. Other amendments include more restrictive covenants for receivable financing facilities, guarantee and lien triggers on ratings downgrades, greater restrictions against certain asset dispositions, and a broader base of subsidiary guarantees.

Leading toymakers Mattel and Hasbro have significant exposures to Toys ‘R’ Us, each deriving roughly 10% of their annual revenue from associations with the retailer, according to S&P Global Ratings.

Mattel’s credit profile was already eroding. The current BBB–/Baa2/BBB ratings reflect negative outlooks on all sides, and resulted from a Moody’s downgrade in March this year and subsequent downgrades by S&P Global Ratings and Fitch at the end of July, as top-line and margin headwinds mounted for the company, blocking its efforts to return to leverage in the low-2x area.

S&P Global Ratings yesterday said that its ratings on Mattel and peer Hasbro were not immediately affected by the Toys ‘R’ Us bankruptcy, though it noted that the filing “will cause incremental gross margin pressure and hurt profitability and cash flow if current receivables are not collected or are collected more slowly.”— John Atkins

Toys “R” Us filed for Chapter 11 in bankruptcy court in Richmond, Va., the company announced late last night.

The filing had been rumored for several days.

According to the company’s Chapter 11 petition, the company has $6.6 billion of assets and $7.9 billion of debt. Equity sponsors are KKR (through unit Toybox Holdings), Vornado Realty (through unit Vornado Truck), and affiliates of Bain Capital, with each holding roughly 32.5% of the company’s shares.

In a statement, the company said it would use the Chapter 11 to “restructure its outstanding debt and establish a sustainable capital structure that will enable it to invest in long-term growth and fuel its aspirations to bring play to kids everywhere and be a best friend to parents.”

The company operates some 1,600 stores around the world under the names, “Toys ‘R’ Us” and “Babies ‘R’ Us.”

The company further said that it intends to seek court supervision for its Canadian operations, as well, under the Companies Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice, but that neither filing would include any of the company’s other operations, which include about 255 licensed stores and a joint venture in Asia.

The company said its operations outside of the U.S. and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing and CCAA proceedings.

Beyond the company’s challenging capital structure, it is worth it to note that the company’s largest unsecured trade creditors include Mattel, with a claim of $135.6 million; Hasbro, with a claim of $59.1 million; Graco, with a claim of $59.1 million; Spin Master, with a claim of $32.8 million; and Lego, with a claim of $31.6 million.

Significant leverage and widespread speculation
The company cited its “significant leverage” as a driver of its Chapter 11, according to the first-day declaration in the case filed by CEO David Brandon.

According to Brandon, over the years the leverage left the company without capacity to maintain stores, provide expedited shipping options for customers, or implement a subscription-based delivery service.

Brandon also acknowledged that the company had “failed to capitalize” on its iconic brand “and its unique position as a one-stop shop for toys every day year round,” concluding, “The time for change, and reinvestment in operations, has come.”

But Brandon also pointed to the “widespread bankruptcy speculation in the media” as “leading to a severe constriction in the company’s trade terms.”

As Brandon sees it, if the media speculation did not cause the company’s financial distress, it clearly affected the timing of the company’s actions.

According to Brandon, the company hired Kirkland & Ellis and Alvarez & Marsal—a law firm and a financial advisory firm both known for their work in large corporate Chapter 11 situations, it should be noted—“to consider restructuring and capital structure solutions.” In addition, Brandon said, in late August, the company began negotiations with a group of lenders under its B-4 term loan to afford it breathing room through the holidays and to consider “restructuring alternatives.”

According to Brandon, however, “A news story published on September 6, 2017, reporting that the debtors were considering a Chapter 11 filing, started a dangerous game of dominos: within a week of its publication, nearly 40% of the company’s domestic and international product vendors refused to ship product without cash on delivery, cash in advance, or, in some cases, payment of all outstanding obligations. Further, many of the credit insurers and factoring parties that support critical Toys “R” Us vendors withdrew support.”

Noting that “the timing of all this could not have been worse,” Brandon said that given the company’s traditional 60-day trade terms, cash terms would require the company to immediately obtain more than $1 billion of new liquidity.

A Chapter 11 filing would allow the company to obtain DIP financing, which Brandon explained would stabilize operations and reopen supply channels for the holiday season.

In addition, Brandon said, the DIP obtained by the company provides “hundreds of millions of dollars of new money that is available for immediate and direct investment in the company’s stores and operations.”

DIP terms
The company said it had obtained a $3.1 billion DIP facility from “various lenders.”

Specifically, court filings show, the company’s DIP facility is comprised of three parts.

First is a $2.3 billion DIP ABL from a group led by J.P. Morgan Chase, consisting of a $1.85 billion ABL ($1.3 billion to be available on an interim basis) and a $450 million FILO senior secured term loan that will be used to refinance existing obligations under the company’s prepetition ABL and for general corporate purposes.

The ABL facility also contains a $300 million sub-facility tranche for Canadian operations.

Interest under the ADL facility is L+250, with a 1% LIBOR floor.

The second piece is a $450 million term loan DIP (up to $350 million to be available on an interim basis) provided by an ad hoc group of prepetition term lenders. Interest is at L+775, with a 1% LIBOR floor. NexBank SSB is the administrative and collateral agent.

The last piece of funding includes a commitment from an ad hoc group of holders of the company’s “Taj Notes” (roughly $583 million outstanding of 12% senior secured notes due Aug. 15, 2021, issued through unit, Tru Taj) to provide $375 million in incremental notes to support the company’s international operations. According to the Brandon declaration, the Taj noteholders also agreed to waive certain defaults under the Taj notes and to forbear from exercising rights and remedies pursuant to a default against the Debtors.

Among other things, the waiver allows the company’s prepetition Euro ABL facility to remain in place, Brandon said.

Also note that the DIP financing includes a provision for intracompany borrowing by U.S. borrowers from the company’s Canadian unit, Toys Canada, and Wayne Real Estate Parent Company, in an undetermined amount, from time-to-time (with the amount borrowed from Toys Canada capped at $75 million). — Alan Zimmerman